USDJPY resisted by multi month downward trendline

USDJPY is currently trading at a multi-month downward trendline, seeing resistance at 91.80. This can be considered good resistance as the trendline actually goes back a long way..

Please see the weekly chart below to have a graphical feel:



As to where the USDJPY might fall, if it does really fall, the next likely support is at 90.50 - the 23.6% level between the '09 high and low (on the weekly chart).

This level provides good support because it kept the USDJPY afloat during Oct and when broken through on the downside eventually, it provided good resistance in Dec when the USDJPY surged (after NFP). Areas where support turned into resistance are often significant because orders tend to congest around there.

Please see chart below.

US STOCKS TOPPING OUT

US stocks seem to be topping out based on a couple of technical indicators.
Please see chart below.



There is currently this phenomena of a divergence between the S&P500 price and both the Rate of Change (ROC) and MACD indicators. As the S&P500 heads higher, the ROC and MACD indicators are making lower highs. I drew lines joining the tops of these indicators and found there is some consistency in both indicators signalling that momentum (hence strength) of the advance is weakening. More likely than not, the bears would take over the market soon.

Also, the tapering off of volume (chart below) points to a growing disinterest in the market.



On the other hand, because of near term volatility and the fact that volume is tapering off, it might actually be easier for the market to make another push higher before turning back down - for this, I'd use the blue lines drawn above the ROC and MACD indicators to gauge when the S&P500 will meet resistance.

New Immediate Resistance Level - 1,121 (50% Retracement of '08 high - '09 low)

The 50% retracement (1,121 on the S&P500) could provide strong resistance to this whole rally as in past recessions, the 50% halfway mark between the pre crisis high and crisis low usually sees some stalling of stock indices, followed by months of gradual down moves.

In fact, this level is just 2.6% higher from where we are now, so how the next few days will pan out will be interesting.

The alternate scenario may happen going into the Christmas season is that a Santa Claus rally causing a break above 1,121 will open the way to immediate targets 1140 and 1185, another 4.3% or 8.4% upside respectively though this is the more unlikely scenario for now.

NFP - 6 Nov 09

The mother of all economic data, the non farm payrolls figures showed that the US lost 190k jobs, slightly above the 175k expected. However, the real wet blanker to risk sentiment is that the official unemployment rate surged to 10.2% from 9.7%, a shocking deterioration of the labor market. Estimates are for a decline to 9.9%.

What do I see for the next few weeks for the markets?

- The USD will remain on the defensive as expectations are growing that the Fed will push back hiking rates.

- US stocks to pull in more of a correction as high unemployment will hurt consumer spending and investors' sentiments, but rangey trade overall expected . Only outperforming economic data can move stocks another leg higher. I think the S&P500 might hit a peak of 1,225 (and I mean the peak) as highlighted in a previous post 'How high can stocks go?'; before we see a 15-20% correction like in previous recessionary recoveries

- The fact that stocks remained bouyant inspite of the NFP outcome goes to show that the level of liquidity in the financial system is enough to float anything you throw into it at the moment. It takes tightening expectations for this liquidity to be drawn out, which might take place during Q1 '10

- Gold and AUD to maintain attractiveness, with the latter expecting to enjoy further rate hikes going forward (as indicated by the RBA in its minutes today). This too, to take place as long as the fed doesn't give a stronger hint to raising rates/ or when the US unemployment rate improves

Post FOMC

The Federal Reserve's rate decisions and statements are very important for the markets and cannot be underestimated. Their actions determine to a good extent the amount of liquidity that remains in the system and this will affect risk assets i.e. stocks.

The fed funds rate decision or statements about impending changes affect yields on US treasuries, which ultimately influences the decisions of central banks around the world because US treasuries are the mainstay of global central banks' reserves.

As expected, the FOMC kept its key rate at 0 - 0.25% for an 'extended period' in order to nurture the still fragile economy, citing that credit to households is still tight and that labor markets isn't yet in recovery. This 'extended period' phrase is key to the outlook of any rate hike - and it seems the FOMC has pointed out that it will look to inflation and the unemployment rate to improve before changing the phrase.

A change in the phrase to perhaps 'considerable period' (ala Greenspan some years ago) will have the most impact on USDJPY as the USD and JPY have the closest (and lowest) yields. It will surge on a fed funds rate hike.

Japan's inflation (or deflation) report out this week indicated that the government expects deflation until 2011, meaning the BoJ will likely not raise interest rates until then, so the yen will be the last in the developed world to enjoy a rate hike, putting the currency firmly as the ultimate funding (carry trade) currency for the foreseeable future.

Going back to the fed, even when they are focusing on both the inflation and unemployment rate for monetary guidance, I feel the bottleneck for a rate hike will be unemployment. Because it is hard to determine the peak and the fed historically wait a while longer after the peak before indicating a willingness to raise rates, there is likely to be a good time of waiting - which, to pro dollar investors, is really an 'extended period'. In another words, this fed looks to me to be a pretty dovish one for now, disregarding the change of incoming hawkish voting member(s) next year.

Friday's expected NFP figure is 175k job losses and a rise to 9.9% in the official unemployment figure. The government said unemployment rate is expected to peak above 10%.

Hence, for now, as long as stimulus is in place and extended by governments supporting risk sentiment, I feel the dollar will remain on the defensive and perhaps decline further against its major counterparts going into 2010.

My EURUSD forecast for week ending 8 Nov

The most significant econ data of the week is the US Q3 advance GDP which at +3.5% beat estimates of +3.2%. This is largely a positive for risk sentiment as it marks the bottom of the economy and within the reading’s components; indications were of broad based recovery.

Looking into the details, household spending actually rose 3.4% even as household income fell 3.4%. It seems that instead of de-leveraging, families are returning to spending quite quickly (namely durable goods) and that suggests that this increase in spending might not be sustainable. That number can be largely attributed to cash for clunkers (new cars purchases with a government grant) which just expired.

Meanwhile, residential investment increased for the 1st time in 3.5 years as prices stabilized with help of 1st time home buyers tax credit (again, more government grants) helping real residential investment to rise an astonishing 23.4% after a drop of a similar magnitude in the 2nd quarter. Hence, Q3 will mark the turnaround in the housing market after the subprime crisis. Its sustainability is also questioned but to a lesser extent as the federal govt is likely to continue with the tax credit program until late 2010.

Prior to the release of the GDP data, we saw some risk aversion in the market during which Goldman Sachs downgraded GDP to +2.7%. EURUSD broke below 1.50 firmly and USDJPY came close to breaking the 90 support level as investors pared carry trade.

An observation is that the yen is coming back as the main funding currency now instead of the dollar as short term yields on the dollar at close to 1% is proving very attractive vis a vis yen assets, giving USDJPY support this week (which kept above 90 for the most part). But I the feel the main pair to watch for dollar direction is the EURUSD, the fact that it is now trading below 1.50 for 4 running days goes to show that mkt has been pricing an eventual recovery in the US economy which was confirmed by the GDP release and by extension, the unemployment rate.

Recently there has also been market talk in the WSJ and FT about the fed preparing to change its ‘extended period’ language and the suspicious may think this was induced by some in the fed to prepare the market for an eventual change in language.

In the FOMC meeting next week however, I think the fed will still keep its ‘extended period language’ because recovery is in its early stages and to do otherwise would be disruptive. But they will put more weight and words describing the recovery of the economy and maybe suggest more winding down of securities purchases in light of better corporate funding and financial conditions. QE has ended and would be a thing of the past. All these are dollar supportive as these have to take place before removal of the ‘extended period’ phrase. So even if PMI data and earnings in the earlier part of the week are good, any dollar sell off would be contained. Rangey trading is expected.

My expected range for EURUSD next week (ending 8 Nov): 1.4650 (50 day moving average) - 1.50 (I doubt the market is willing to take on risks before the outcomes of the FOMC on Wed and NFP on Friday.

How high can US stocks go?

I just took a look at the S&P500 weekly chart to see the next target point(s) should the bullish run continues.

It seems that the next important target is 1120 (red line), which has proven also to be a good resistance/support level for the broad equity index dating all the way back to 1998.

1120 happens to also be the 50% retracement level between last year's high and this year's trough, hence highlighting the significance of this level. Its like ISM's 50 expansionary/recessionary cutoff.

If the upward trend continues, the market should have less gyrations between 1080 (red line) to 1120 as this space in between looks quite clear historically. I've gotten the level 1080 from the confusing 'rays' - which I highlighted as brown lines. These are gann lines and show the natural support/resistance levels like Fib lines do.

In terms of momentum, it seems things are going well for the current trend. Volume continues to be higher than usual (vs pre- 3Q '08) and this means good interest in the equity market on the way up. Rate of Change (seen by the ROC section at the bottom) have ascending lows so this spells good momentum.

Beyond 1120, the next objective is 1220, which historically has been a good resistance/support levels for years dating past.

In terms of support, the first line of defence has always been the 12 wk mva (red mva) - a representation of the quaterly average of prices (some funds do window dressing every quarter btw). That currently stands at 1024, where the mkt bounced up from last week. The next level of support will be on the gann line, but because we are pretty far away from that now, let's leave this story to another day if the bear does comes to eat up the bull.

My GBPUSD forecast

For the Gbp especially, it is hard to see much further upside from where we are at now (GBPUSD spot 1.5887) when policy makers appear to lean towards a weaker sterling. (King saying that a weak Gbp is beneficial - Thur 24 Sep 09)

To be sure, the UK economy is running huge public debts - to the tune of a level which rating agencies like Moody's usually flashes red lights for a possible downgrade.

But at the moment, the UK will keep their AAA status.

Right now though, PM Brown has said he will not unwind quickly the levels of debts until he sees the recovery becoming firmer and more sustainable.

My thinking is.. with the poor fiscal outlook and debt levels as the UK's, it will probably take some years to deleverage and finally achieve a more prudent balance sheet.

Even if the economy does pick up, the currency is likely to underperform the Eur and the dollar. For the latter, the reason being the US is expected to push itself out of recession faster than the UK. For the former, well, at least no central banker wants to talk down the currency in such a direct way.

The pound used to be one of the highest yielding currencies in the developed world and has been a big favourite for the carry trade.

But we might be seeing a permanent change occuring right now. The Gbp may not return to as strong as it was before, given it needs time to sort out its public debt and groom other parts of the economy to replace the sputtering financial industry and contribute to taxes.

So I'm out on a limb here, saying that in the medium term, we might see parity in the EURGBP (spot now is 0.9216).

My forecast for GBPUSD anyway, is 1.5600 (Dec '08 congestion high) to 1.6230 ( near neckline of double top reversal).

My EURUSD forecast this week

The focus of last week had been on the relentless move to the year's high for the currency majors like Eur, Nzd, Aud and of course, the stock markets.

And then came the correction following the FOMC statement on Wed 23 Sep 09 and the pound led decline on Thur. Recall: BOE chairman Mervyn King said a weaker Gbp will help the UK rebalance its economy towards one more dependant on exports. **GBPUSD fell 1.6% (a massive 200 plus pips down move) following that.

The feeling of euphoria that drove the markets higher for several weeks now is seemingly checked and can only be boosted by the occasional M&A activity like today - we hear Abbott and Xerox making multi billion dollar offers for Solvay and Affiliated Computers Systems respectively. The Dow now trades +137 pts and the S&P 500 +1.7% at print. Other than that, we will be in limbo until Q3 earnings are out from next week onwards.

Compared to the previous FOMC's statement, Wednesday's statement highlighted further recovery in the housing market and the fed deemed fit to slow down mortgage securities purchases until end Q1 '10. This effectively leaves the US unemployment rate as the main factor for the USD outlook.

This Friday, the Non Farm Payroll will be released and judging from the trend of better Jobless Claims in the past month or so, there might be a chance for a surprise. The U/E rate is expected to increase to 9.8% from 9.7%.

So I think, together with the slight rise in the dollar index recently, we'll see a firmer comeback in the dollar this week - confirming that a better than expected NFP will boost the dollar.

My expected range for EURUSD this week is 1.4500 (early Sep support) to 1.4850 (shouldn't break last week's all year high)

Aug 09 Non Farm Payrolls

The marquee event of the week is of course the non farm payrolls release. Coming in at -216k, it represents the slowest decline in the layoff rate in several months. However, the official unemployment rate rose to 9.7% from 9.5%.

My initial reaction was of a bearish one as I thought, ok, so even if the NFP fell less than expected but the labor force could not build on its improvement in the last release, so the market will have to bear the brunt of what even the fed feels is the biggest headwind facing the US economy today.

My feeling was proven right in the first hour and half after the release. The FX majors sold off against the safe havens of the USD and the JPY. Futures traded lower. I rode on a little bit of gains but of course, in hindsight, my view was wrong.

The market decided to see the brighter side of the NFP release and risk taking came back, pushing stocks and higher yielding currencies higher against the dollar. By the end of the night, the dow added about 100 pts.

I guess the market, taking a forward looking view, felt that the slowing job losses is a good sign - that the worse of the US consumer is a passing phase and that now that the overall unemployment rate is closer to it's peak, things might get better from here.

In FX, my bias-ly favoured market, the dollar index lost ground. Looking at price action in the past week, I failed to analyze one thing. The fact that the majors were decidedly rangey was because traders were wary of a more firmly better than expected NFP which will cause a sell off in this currencies against the dollar.

This was what happened in the last NFP release in July. The thinking goes: if the US u/e improves faster than expected then the fed might hike rates earlier, making the dollar a lot more attractive to investors at current price levels. Especially against the yen, as yields on JPY assets are and will be kept low for a longer time.

And now that the thinking has to be shelved for the time being, I am biased to think that the major currencies would build on friday's momentum and advance against the dollar. Especially the Aussie, the only currency whose central bank has given hints interest rate might be hiked going forward.

What do you think?

Trading is a discipline

On hindsight, we are all geniuses. The investor who predicts market behavior correctly after the releases of big news stand to make the money. But, its probably very hard to do that.

The market, being the brain of thousands of investors making decisions to buy / sell at the same time can be very unpredictable, fickle and often both. But, the market is still the most efficient machine to determine what prices of assets should be.

This is the giant machine that I have come to respect and behold.

I used to be a hit and hope, impatient, emotional investor. And hence I have lost a lot of money. And more than what I've planned for.

But I guess this experience in losing has taught me valuable lessons, which I guess I wouldn't internalize as much as if the money was not mine or it was a substantially smaller sum.

Number 1: Be happy to cut losses while they are small. Ironic but I guess this is the most important to me. Its all about the maths, if I can keep my losses contained, I will have a chance of making an net profit at the end of the day. I try to keep my losses limited to 50-100 pips per FX trade.

Number 2: Perceiving the right risk-reward positions gives me a competitive edge. I strive to determine where supply and demand imbalances are and then leave orders at levels which I think are reversal points or, a floor/ceiling in the case of a continuing trend. Technical Analysis is very useful for this. If you ask me, circa 200 pips of an FX profit is pretty decent, or 2-4x your loss limit. You can see a few of these moves within a week in the FX market.

Number 3: Be very patient for the right opportunities. In the market, opportunities will present themselves often. I won't want to chase a price after it has gone higher because I think I've missed out on a good entry. As I said, trading is a discipline, literally.

Number 4: Take profits. 'Nobody ever loses by taking a profit'. Greed is probably the only thing which makes an investor think the price will always continue to go in his favor. In volatile markets like now, I take profits unless there is a good fundamental reason for me to not do so.

Sentiments have changed

The market sentiment has turned for the worst. Dow now trades -160 points or -1.61%. I guess the illiquid situation isn't helping. And also some players (hedge funds story in bloomberg today?) are really putting expressing their bearish views. Dang! On hindight, my sell order at 9460 that wasn't hit really hurt now.

Buy on the rumor, sell on the news.

Just as I have expected, US stocks were well bidded before and just after the release of the ISM manufacturing and New Home Sales data. The Dow traded as high as +60 following getting stuck in the negative zone (-80 at its lowest) as European stock indices were in a dour mood earlier today.

However, it retraced all gains and went back into the red (-20) at the point of writing, as I expected. But my order to sell at 9660 wasn't touched because it just fell out of the offer price. D*mn the huge spread. I got a feeling we won't close too much in the red today anyways (> -40 pts Dow), as buyers will eventually come into the market on bargain hunting, pushing up prices in this still illiquid market.

Well, its true that with these data, the US appears to be well on the cusp of emergence of recession. But then, so is the Eurozone.

So why the massive stock sell off today? Its because of the suspicion that stock valuations are getting ahead of themselves and that we may not recover as promptly as once thought, given the high unemployment in the US and the EZ. To recover quickly, consumption needs to recover at a good pace but that remains to be seen and u/e and credit flow are the bigger headwinds.

Still, the market is trading on news day after day while waiting for more volume/liquidity to return to the market to push us out of the current trading ranges we're seeing (in FX and stocks).

Have a good day ahead!

USDJPY halfway 'house'

USDJPY is currently trading at a critical support level (93.50) - line highlighted in orange, which from the chart below, is about the mid way point of the wild range of 87 (dec 08 low) and 101 (apr high) we've seen since the crisis started.

Being the centre of all the gyrations in the market, this level has the potential to be the pivot point for the pair going forward.

But for now 93.50 acts as an important support level - it being the neckline for the dec - feb double bottom reversal and supports for March and July sell offs according to the chart. Also, a support line can be drawn from the Dec low to current price and it looks like a nice supportive line for the Jan and Jul sell offs.

From a broader picture however, from April till now, the highs for USDJPY has been getting lower and technically, this spells a bearish market. But going into Sep, we might see some buying. ST resistance should come at a near 95 though, the 50 dma.

Elliot wave theory - downard momentum for the USDJPY

Just another note:

The Elliot wave also can be applied to the USDJPY monthly chart. The Elliot wave is made up of 5 mini waves, which stages I've highlighted in the chart above.

Usually, the final wave (5) tends to be stronger as by the commencement of wave 5, the buyers in the market (waves 2 and 4) have already been exhausted, leaving more selling power in the market.

If this were true, wave 5 might have good momentum in the run down towards to 90.

The Rate of Change component also point out that any buying in the previous months has lacked the strength to even come close to overturn the overall downward move, having been capped at the zero level and still heading downwards.

USDJPY's 2 yr downtrend

Discovered something on the USDJPY: below is the monthly USDJPY chart.

I joined the peaks of the pair dating from Q307 till now (2 yrs) and saw that the pair has been strongly resisted by the downward trendline (blue). With the global recession remain until at least 2010, I think this downtrend is likely to remain in place until the end of the year..

In recent months, the pair has been hugging to the resistance line more tightly, but on a month end basis, could not close above it.

The highs were also rather 'obedient' and did not move that much above the trendline.

The largest outbreak was only about 90 pips and was due to the last NFP report and after that, USDJPY 'normalized' downwards. That high was 97.75 vs trendline resistance of 96.84 (Aug).

ADX shows a strong number - 35 and that means a good trend is still in place and will take time to undo.

And IF assuming that the downtrend will remain in play, these are the levels below which the USDJPY should close on a month end basis.

Aug 09 - 96.84
Sep 09 - 95.92
Oct 09 - 94.86
Nov 09 - 93.87
Dec 09 - 92.75

Story of the week

Lets see if the latest theme in FX has got the legs.

With the US enjoying an improvement in residential property sales, better than expected construction of single family homes, GDP outpacing expectations of -1% vs -1.5%, it seems now that the US economy is on the cusp of recovery ahead of the EZ and the UK.

And then, the Fed will raise rates, making dollar assets more attractive that Euro denominated ones as USD yields outperform.

That's why the dollar has seen good strength against the single currency Euro and Sterling Pound. The GBP of course, is still reeling from the BOE's decision to increase the printing of an additional GBP 50 bn for QE - to ease monetary conditions in the UK.

A few banks have been calling for a stronger dollar on the back of the US' recovery story, but none has predict this to happen so soon. In fact, 1.47 - 1.50 is a popular target for the EURUSD pair before analysts see a return to 1.30 by start - mid 2010.

Anyway, let's see how far will the current theme run.

Good support for the EURUSD and GBPUSD should come at 1.40 and 1.63 - the support line of the congestion trading in Jun-Jul 09.

I'd be buying from these levels as I see that there are still headwinds facing the US economy - declining commercial real estate values, rising unemployment and already high valuations of stocks.

Main Street looks good

The earnings from corporate America so far have been better than expected and the outlook announced by some of these firms add to optimissm that the global economy isn't so bad afterall.

The worst is truly over.

These major firms beat expectations, pushing the stock indices higher pre NY open:

Caterpillar - construction
Coca Cola - consumer
Merck - pharma
Du Pont - chemicals

Whether or not analysts have put the earnings bar too low is one thing (they might have been too much on the conservative side), but at the moment, stock valuation at current prices do look attractive.

Goldman Sachs and some other banks raised their year end target for the S&P 500 to slightly above 1000.That's an additional upside of 4.4% from here (957.05 at print).

It looks like we're leaving the Mar crash well behind.

Its not all that rosy in the banking sector

Yes its not all that rosy.

No doubt every major bank that reported Q2 results had reason to be proud of itself as the earnings easily beat estimates; there's little reason to be upbeat about future earnings.

This is especially so for the banks which has big consumer businesses like Citi and BoA. Firstly, Citi and BoA avoided losses in Q2 only because respectively, they sold Smith Barney brokerage and China Construction Bank stakes profitably.

They took more credit losses in the last quarter for the consumer businesses and expects this part of their business model to remain weak for the forseeable future. And that means, improving next few quarters' earnings will be challenging.

FT says Citi and BoA suffered USD 12.4 bn and USD 16.4 bn in credit costs in the last quarter.The economy must pick up fast for them to continue to do well but I think there's more de-leveraging to be done by the US consumer, the recession will be around for some time.

In contrast to investment banks like Goldman and JP Morgan, whose capital markets businesses are their earnings lynchpins, have lesser consumer related baggage.

So that doesn't sound too upbeat for stocks to me. Afterall, the S&P500 is made up of a larger group of firms that has little to do with the investment banking giants like GS and JPM and if earnings don't look too good, the euphoria will not last long.

Stocks will need more other reasons other than the bank-led surge to move another leg higher.In the following days, regional banks will too, announce Q2 earnings and these banks being more exposed to the American consumer would likely not do so well.

But the good news is... Initial Jobless Claims on Thur point to a firming to some extent of the labour market. The claims fell at a record pace as sackings in the auto and manufacturing industries have already been carried out earlier in the year.

Although Continuing Claims, an estimate of still unemployed people is at a record high, Non Farm Payrolls numbers should improve going forward.

Till then, the market is still focused on the rest of the earnings season.

We're slowing down

I don't have to say again what happened in the last 2 days.

Earnings announced thus far have outperformed very well, sending stocks and higher yielding currencies higher against the dollar and yen. If you were long in this market, good for you.

Today, there had been a wet blanket thrown into the mix - the CIT group's impending bankruptcy filing. Talks with government officials broke down, apparently because the company could not find a way to restructure and save itself going forward.

I'd say its politics. Afterall, they let Lehman, GM, Chrysler go, what's more a relatively small company like CIT.

A lender to many small and medium sized businesses, CIT's bankruptcy represents the wider tough credit picture the US economy is facing - which puts a drag on the recovery process.

This is a different problem from that which the bulge bracket investment banks face. The small and medium sized business are the largest group of employers in the US. If these businesses could not get credit, more people will get laid off.

The market mysteriously lost its euphoria. During the asian trade, the Dow traded negative.

Also because I believe the market's 3% surge during last night's trade was also to price in JP Morgan's better than expected Q2 earnings announced just today. True enough, when JPM's news was out, its stock actually fell on profit taking.

From here there are plenty of choppiness to be expected as some big firms have yet to announce earnings.

I'd advise against going too long from here.

Wild swings

What a day to start off the week

During the asian and early europe session, risk aversion was the call of the day as doubts about the global economic recovery came flooding back into the market. GBPUSD, a reasonably correlated currency pair with stocks, fell to as low as 1.6032 from an open near the 1.62 level, a 170 pips fall.

The over 2% fall in the Nikkei 225 started the ball rolling as PM Aso lost in the Tokyo election, which is widely seen as a national poll verdict for the ruling party. It seems the ruling party will be heading out of the government, sooner or later.

USDJPY once crashed to 91.72 (yes again), bringing down the EURJPY and GBPJPY crosses about 100 and 250 pips! at their lowest.

Then came Ms Meredith Whitney, the analyst who once famously predicted that Citi will cut their dividend payout at the onset of the whole credit crisis last year. She appeared on Bloomberg and CNBC interviews and said Goldman Sachs will outperform expectations. That lent support to risk appetite and gave optimissim that the banks are healing.

The Dow traded feebly within the first hour and then surged higher. At print (Spore time 11:44pm) it trades +130 pts. GBPUSD is just 40 pts short of its open, after recovering much of its losses on the day.

The optimissim is good, however, for it to last, more meaningful hard data has to be seen before we can conclude the US, the world's largest consumption market, has the recovery legs.

I think tomorrow's US Advance Retail Sales is an important econ indicator. The market expects an increment of 0.5%.

Q2 earnings are very important to watch this week as well. Goldman Sachs are out tomorrow (14 jul) before the bell and the rest are as follows for this week:

Intel - 14 Jul - after mkt - estimate: +3.5 / share
JP Morgan Chase - 16 Jul - estimate: +0.153 / share
IBM - 17 jul - +2.01 / share
Citi - 17 jul - -0.321 / share
GE - 17 jul - +0.24
BoA - 17 jul - + 0.088

I'd not bet big ahead of these important releases.

Risk aversion in FX

Stocks were mixed at print - 11:48 est time. The dow is slightly sub zero but the S&P500, down 0.74%, below the all important head and shoulders neckline of 880.

The S&P 500 is currently trading at 877. Another's day close below this level could open the way for further declines. Poor economic outlook by companies which report Q2 earnings in the coming days will kill the market.

As this point, we need more convincing evidence of economic growth before risk appetite receives another leg up, but it doesn't look like it at all.

Shorting on strength of risk assets remain my strategy unless Q2 earnings tells us things are not as bad as they seem.

As I have mentioned in my previous post, the yen has emerged as the favoured safe haven currency of choice instead of the dollar. Cross yen currency pairs have sold off massively at print. EURJPY and GBPJPY have lost massively - at least 3% each.

USDJPY is 2.6% lower as well.

Wow.

Rangey day

Risk aversion is seeping back into the market. The Dow now trades -80 (11:16 est) even in the absence of bad econ data. European trading were tepid as well.

Even last night's positive close in the US stock markets were due to defensive stocks moving higher e.g. consumer staples. Breadth of the move was poor as well, meaning the upmove appears weak.

I heard that speculative accounts have been selling risk assets recently so as to lock in profits ahead of the US Q2 earnings season. There're risks of poorer performance as compared with Q1.

Alcoa, the belweather commodities firm will report after the bell on Wed 8 Jul.

As one analyst put it, the market is likely to react more strongly to bad news now than good news. I feel that in this non trending environment, this is likely to happen as well.

Some TA analysts say 890 is the neckline support for the head and shoulders pattern formation for S&P 500. If broken, prepare for another surge downwards.

In FX, the majors traded rangey against the dollar in spite of the decline in US stocks and the looming sense of risk aversion.

This is because tonight, the Treasury will sell about USD 30 bn worth of treasuries, worsening the fiscal position of the US and pressuring the dollar. The market has been harping on about the increased supply of treasuries but auctions (demand) have been good.

Yesterday the Treasury successfully sold USD 10 bn of treasuries including TIPS with good bid to cover ratio.

Central banks (through the way of indirect bids) have lent support to treasuries. It makes sense because where else can they park their dollars. The dollar and treasury market liquidity comes at a premium.

In contrast, the ECB has been very prudent with their monetary policy and I feel this is the main reason the EURUSD is supported. Members like Weber, Stark and Noyer have stated that 1)inflation is not a concern 2) no additional asset purchases are needed now - which will help the fiscal position of the EZ.

Today, the EUR tried to make progress against the dollar but to no avail given the poor risk appetite.

However, in the coming few days there could be good opportunities to long the EURUSD for a medium term bet because monetary policy is what will drive prices, rather than the risk aversion flows.

NFP day

Of course the mother of all econ data - the US non farm payroll numbers, which came out much worse at -467k vs expectations for a - 300 plus k reading and killed the market.

US stocks are trading -2%.

Reading into more details, the depressing thing about it is that the service sector lost alot more jobs than in previous months. As the service industry make up a bulk of the world's biggest economy, this is a big hit and will put to rest hopes for a quick rebound in the US economy.

Even the federal government fired more than they hired.

I'd be watching the next few months' service industry sacking rate to gauge the strength of the recovery.

Comparing with fx however, risk aversion flows into the dollar is not as drastic, surprisingly. The Euro and Sterling Pound are trading just under 1% lower against the greenback, compared with close to -2% in stocks. Only the NZD is trading lower by more than 1% against the dollar.

Reason being, the weakening US economy does not bode well for a strong dollar. Also, next week the US Treasury will be issuing close to USD 80 bn worth of treauries, further weakening the fiscal position of the US.

This of course, though is not as high as the record USD 104 bn issue last week, is still a huge auction by any measure. Afterall, its all accumulative, like our own credit card debts.

Going forward, I believe there should be a continuing of dollar buying in the next few days as the market reverberrates from the shock of the NFP fallout. But this would be limited for the reasons mentioned above.

Over the medium term, I see the majors strengthening against the dollar.

Yen looks likely to be the safe haven of choice. Japan afterall sits on massive savings and has surplus supported by investment income. Selling cross yen pairs (e.g. EURJPY, GBPJPY, AUDJPY, NZDJPY) in the event of risk aversion would be ideal.

Day with fair weather

As mentioned in my previous post, China's PMI, which many expected should surpass expectations, did just that and added some more positivity into the market.

To that, european data was not too shabby as well, helping the majors rally against the dollar, besides JPY.

In the US session, US ISM manufacturing and pending home sales were acceptable as well and pointed to slowing contraction in the economy, lifting stocks.

At print, the Dow is up 100 pts.

I hope you have been long on the higher yielding currencies.

Tomorrow will be a data-full day, including Non Farm Payrolls, expectations are for a -370k reading.

Trading should be rangey ahead of that release.

Nothing on a weekend

I can't seem to find good trading opportunities in the FX market at this point. But I will post something as soon as news are out dictating the week's flavour.

It seems that the majors have been trading in a range against the dollar, capped by previous highs set in the past weeks as the market is bidding its time to assess latest econ data to see if the greenshoots are ever going to lead to more certain recovery in the global economy.

There are certainly headwinds against this, e.g. rising unemployment in most parts of the industrialized world, potential write downs for european banks, continuing de-leveraging within the US economy etc.

But econ data are showing slower contraction on all fronts - the question is, which investors will bite (and grab risk assets)?

Or are we in for a moderate correction in risk assets?

Next week we loads of econ data that can confuse the mind, but my tendency to lean towards better sentiments.

Because China's data, which tends to give the weary stock markets a good boost, may turn in a good result for the PMI reading (out on Wed 1 Jul), helping commodity prices, (and commodity) currencies, related stocks - spilling over into the europe/US markets, and so on.

Still, we are prone to plenty of event risks considering the various cenbank meetings/statements and econ data surprises.

e.g. hear what more China has to say about diversifying away from the dollar as a reserve currency, SNB's further involvement in the fx markets, a shocking NFP of course.

Nonetheless, I hope you will have a good week ahead!

Euro-easy day

Econ data from the US out today:

1) new home sales poorer than expected as foreclosures keeps supply of homes elevated and prices suppressed, making resale homes more attractive

2) durable goods orders better than expected, turning in a positive number vs a negative one expected - lending hope that the economy will see better capital investments and business spending going forward as the economic decline continues to ease

Stocks initially fell on the release of the first piece of news but recovered to trade about 1% in the positive territory after the release of the second.

I guess the stock market needed a reason to be bought and so 2) was the boost.

In FX however, we have seen some choppiness with the movement of the majors. EURUSD traded higher earlier in the day, touching a high of 1.4139 before retreating back into the 1.40 handle as the ECB manages to lend out a higher than expected amount of funds - to the tune of just Eur 442 bn for one year at the rate of 1%.

This program is unprecendented and is aimed at flooding the banking system with cash so as to improve liquidity and encourage lending. The last time the ECB did this was in Dec 08, the midst of the crisis. Note that the cenbank also said they would not lend at such good terms again.

And the response by the financial sector was better than expected. Eur 300 bn was the initial estimate for the take up. As a bank, I'd say, why not? Its cheap money and I might as well borrow whatever I can first, then think of ways to make a return on it.

However, even as the system is flooded with supply of Euros, it does not mean that the value of the Eur will necessarily fall, as banks are still reluctant to lend to businesses. M3 money supply growth is in fact still decelerating.

Yes forward looking data in the EZ are good, but we will monitor the hard economic data when they are out in the coming weeks, as well as private sector lending to see how much more Euros got into the system.

In Dec when the ECB launched this program, the Eur didn't suffer, and there's no reason for it to now either!

I'd be looking to buy EURUSD on dips as a medium term strategy, playing with the economic growth story and the fed's easy monetary policy.

The spin around in FX

The early hours in europe trading saw the major currencies trading lower against the dollar as the 'greenshoot' theory of global economic growth was continually thrown into doubt.

FX traded along with tepid movements in risk assets like stocks as the Eur, Gbp and Aud were on the defensive.

However, following the release of the Jun EZ PMI data, which saw a weaker than expected result, the EURUSD surged from just under 1.39 to 1.4088 at print (a whopping 188 pips higher), or 1.64% higher on the day.

Along with it, the other majors are trading positive against the dollar as well.

Funny how the Eurusd turned out because from the PMI data, the services sector in europe is still in the doldrums and Q2 growth is expected to still be poor. Why did Eurusd jump?

I feel today's move is less dependent on the econ data released. Rather, the cenbanks and key option levels could be very well at play here.

The Swiss cenbank SNB may be in the market to keep EURCHF above the psychologically important 1.50 mark so as to keep the swissie more competitive (Spot - 1.5020). This is very much in line with the SNB's recent rhetoric to stay the strength of the safe haven swissie.

Yes no doubt the USDCHF has declined but as all other currencies have gone up against the dollar, the SNB will have to put its attention unto capping the CHF strength against the currencies of other nations it trades much with, namely the Eurozone.

And when the cenbank like the SNB moves, they can usually be quite effective.

With this out of the picture, it feels like another almost directionless day as stocks (the dow) bounce between the positive and negative territories.

Tomorrow is the FOMC announcement. All eyes will be on that.

Right now it also feels that the market is positioning itself for a statement by the fed that they will continue with the loose monetary policy, keeping the dollar under pressure. Hence, the majors are higher. We'll see.

Gone missing / A healthy correction

In the blink of an eye almost 3 weeks have past since my last post.

I've been really busy at work and occupied with other things in my life that I can hardly sit down to watch the markets as closely as before.

But now, I should be able to get my old routine back and blog more. This should be helpful for me to keep track of my trading and put into words my thoughts. It helps me not be too fickle about my strategies.

Today, the sense of nonchanlance was palpable in the markets while I was in the office. There did not seem to be anything that could lift sentiments and give stocks another boost.

Yes asian stocks rose but it didn't feel like the euphoria of the recent weeks as investors start looking around them to see what could be the next springboard. But there's none right now.

The reality of the world economy still being in deep recession is starting to bite again as it seems increasingly likely we are not in a V shaped recovery.

In FX, safe haven dollar buying dominated the screens. At print (12 am Spore time/12pm est), both the GBPUSD and the EURUSD are already losing 1% and 0.73%.

Lead by the spectacular fall in commodities today (oil -4%), commodity currencies are digging holes in the ground. AUDUSD and NZDUSD are down a huge 2.11% and 1.8% respectively.

The Aud move however, I feel is partly because the market is pricing another rate cut by the RBA following a hold in the last meeting.

Altogether I feel that the selling of the major currencies against the greenback have been a long time coming. Prices don't rise in a straight line and these moves in FX only present better buying opportunities.

My rationale for a weak dollar over the medium term is because the FOMC has to show a willingness to keep a loose monetary policy until the economy has cleared much of its slack and leverage, before there's a good chance of sure recovery. Afterall, u/e rate in the US is fast approaching 10% and rising still.

For now, we've been seeing better than expected economic data, but to solid growth takes 'better than better than expected' data.

This Wed, the FOMC will release their highly anticipated interest rate announcement at 2:15pm est (2:15am spore) and the market awaits to read the accompanying statement. Of course, rates are expected to remain at 0 - 0.25%.

If the FOMC did not mention raising rates and says to keep rates close to zero for an extended period of time, then over the medium term, I'd be a dollar bear. *this is my assumed likely scenario*

If they do announce more details into the exit strategies they might employ to soak up the massive injected liquidity, including increasing fed funds rate before the end of the year, then the dollar might jump against most currencies.

But it all depends on the wording the FOMC uses and how the market perceive to what extent the FOMC is thinking of tightening, if they are at all.

Man, I never did pay this much attention to my school teacher's words in the past.

The rally just doesn't end.

What could have built up to a day of non-event, the market re-wrote the script the moment Europe and London came into the office.

This might have got to do with China's Apr PMI reading which came in better than expected. Also, exports have turned positive for the first time since mid 2008, which means global demand has started to pick up.

The green shoots are taking root. And stocks love that story. Who cares if GM has filed for bankruptcy? The Dow is trading +180 points at print.

The USD was dumped across the board yet again. I can't say which currencies because there are just too many of them. Basically, normalcy is really being priced into the fx market AND the market is expressing concern for inflation for the longer term.

Gold, silver, oil - alternatives of store of value agst the USD have seen really good bids recently. Gold's high today is 988, just USD 12 shy of the 1,000 target.

Next week, we will have the 10 and 30 yr US treasury auctions and success of this is important to the ability of the US government to fund its massive stimulus plans.

If the market cannot absorb the increased supply of treasuries as well as wished, then, expect the dollar to be further pressured on an expectedly weaker US economic recovery. Stocks would have reason to be capped for the moment as well.

For fx this week, we are seeing an increase in non-commercial short dollar contracts, which means more players are riding on the upward trend of the higher yielding currencies against the dollar.

It'll be really interesting to see how far this can go. And it'll take a really brave man to bet against the tide.

Another same week

I hope you did buy the major currencies on the dips this week. Currencies like Eur, Gbp, Aud and Nzd have continued to be on a tear against the greenback.

GBPUSD had been the stellar performer, hitting 1.61 t0 come close to 50% retracement between last year's high and this year's low.

One reason why these currencies moved big time were also due to long term yields moving higher this week. The market feared that investors will not soak up the increased supply of debt issued by the US govt to fund its stimulus packages and sold off treasuries.

Higher LT yields also endanger the recovery of the Us economy because borrowing costs, which usually come at a premium to risk free yields, will be pushed up. The housing market will stagnate and so will corporate borrowings.

If US govt debt auctions do not turn out as well as expected, then we can expect more selling of the dollar as well, as investors start to think about re-allocation into other currencies as the US economy falls further into danger of non-recovery.

That though, needs to be balanced against the allure of higher yields (returns) on dollar based assets. Japanese investors this week have shown an appetite to take risks again, buying up dollar based assets, hence pushing up the USDJPY to 97 from 94 in the middle of this week.

But going forward, the market will still pay attention to US govt debt auctions for directions. Even stocks too, is behaving accordingly. Better debt sales will help stocks as yields are brought down.

This coming week, I prefer to not be so greedy to continue to buy into the majors (higher yielding currencies) at every chance. Alot of central bank meetings are taking place, not to mention major econ data like the NFP on Friday.

The ECB will announce more details into their covered bond buying scheme. We'll see if they are open to more buying going forward, if so, that might hurt the Eur.

What a week it has been

What a week it has been in the FX markets. The greenback's massive selling off had been exacerbated by the possibility of further quantitative easing steps and asset purchases by the Fed, as revealed in their Apr meeting minutes.

Just this week, the dollar lost 4.97%, 3.72% and 4.49% against the Sterling Pound, Euro and Aussie.

And myself, I lost some money on the GBPUSD recommendation I posted last week as well (a loss of 120 pips). But, the murder had been a quick one as the price of the GBPUSD blitzed past my stop order so quick I couldn't react.

Yes the meeting minutes played a role in the dumping of the safe haven dollar, but I believe this is a part of a sea change towards valuation of currencies. This week's moves are a confirmation that the worst of the global recession is over as prices are trying to find their way back to normalcy.

Of course, we will not see EURUSD, GBPUSD and AUDUSD trading back at the heights of 1.62, 2.00 and 0.95 like in the heady days of '08 any time soon, but the markets are making adjustments already. Even ahead of the stock markets.

This week, the Dow traded almost unchanged, but currencies moved like crazy. Going into the next couple of weeks, I trust there would be potential for a correction back down but I am not making any confident calls right now as I have not found objective support/resistance targets after the strong bursts higher.

For the above major currency pairs, I suggest trading using the day's main theme and riding on the day's trend will help prevent excessive losses as compared to leaving positions open multi-day.

But if the corrections are strong, I'd favour buying these majors against the dollar for a longer term trade.

My GBPUSD forecast

I feel that there will be a correction downwards in the coming 1-2 weeks as the trend upwards tires out and investors take profit/re-assess the Bank of England's willingness to rely on Quant Easing measures.

Quant Easing is the printing of money to purchase govt bonds or other securities from investors, as a direct form of injecting liquidity into the economy.

The release of the UK's inflation numbers on Tue 19 May may reiterate this. The BOE is very keen on keeping the inflation numbers' fall in check to avert stagflation.

This is the primary reason for them to expand QE measures by GBP 50 Bn to GBP 125 bn in the last BOE meeting. Following that announcement, the GBP fell but remained support by bouyant stocks.

And on Tue, if a faster than expected decline happens for the Apr CPI numbers (mkt expects 2.3% yoy vs 2.9% previous), then the BOE will see a need to quicken the pace of QE or even increase it, though I doubt this will happen given the laid out schedule for QE needs some doing to complete.

On price action, the long legged doji on the recently concluded week for the cable indicates indecision after a 2 week surge (see weekly chart below).

The 23.6% retracement level shown in the chart also provides reasonable resistance.

A little bit on Technical Analysis for the GBPUSD - Rate of Change and Williams %R on the daily chart, both measures of momentum have shown declines, with the latter, falling into negative territory.

These give support to a weakening trend and certainly shows potential for the pair to head down (see daily chart below).

My call for GBPUSD for the next two weeks (until 29 May 09):

Sell GBPUSD from 1.5255

Stop loss: 1.5375 (above 12 May high)

Take profit: 1.5014 - potential 241 pips profit (above 1.50 psychological support)

Profit taken on USDCHF

Having seen the USDCHF trade in a range in the past few days, but showing some potential to move higher (as noted in my 13 May My Forecast post), I bought into the pair at 1.1062 on Wed.

Last night, the pair did hit my profit level at 1.1188, giving me a profit of 126 pips under 3 days.

But I hadn't been greedy enough. The pair was last done at 1.1220 and I think there is still more upside to it.

Still a profit is a profit is a profit and I should be thankful for that.

Have a good weekend!

Trading Psychology

A good article on one's perceptions of demand and supply in the markets.

http://www.tradingacademy.com/lessons/20090512/featured_article.htm

Enjoy..

Getting things up

Nice to know.. Pfizer is giving out free drugs, including viagra to people affected by the recession.

Talking about giving people a 'leg' up.

http://www.cnbc.com/id/30742297

My USDCHF call

This is a play based on technicals which I feel provides reasonably good risk-reward opportunity for the USDCHF.

From the daily chart above, we see two hanging man candlesticks formed on the 11 and 12 May. The bodies of the two bars are almost identical in height, and are completed by 'legs' at the bottom.

The legs indicate that there had been buying interest in the USDCHF since the 11 May even while bears are trying to push the pair lower. However, the bears could not force the issue and close the price near the lows, allowing space for the bulls to take over slowly.

Hence, I'm going with the flow and am staying on the side of the bulls.

My call for USDCHF until next Fri 22 May is:

Buy from 1.1062 (bottom of 13 May 09 candle)

Stop loss 1.0973 (lower than last low touched on the 13 May)

Take profit at 1.1188 (near lows touched in late Mar)

Profit taken on USDJPY trade

I recommended selling USDJPY in a post on the 25 Apr 09.

My order to sell was hit at 99.25 a few days later on the 1 May and I just took profit today at 95.85 - a 340 pips profit.

I had to wait for more than two weeks for this trade move over 99 and come back down. But I guess the wait was worth it.

Volatility hadn't been enough to cause me a heart attack and fundamentals (as explained in that post) gave me the confidence to hold this position for the two whole weeks.

The only scare came as USDJPY hit a high of 99.74 on the 7 May, just 10 points shy of my stop loss order before it crumbled back down and never looked back. I guess it is rather important to not place the stop in a 'hot zone', where the price tend to congest as chances are that your stop loss will be hit out of volatility.

In this case, the stop was placed above the previous price surge and my trade was safe. Or else, it'd be shameful to say I had the right view but could not profit on it.

Hope you have been profitable too.

No weekend forecast

Technical indicators for some majors appear overbought, but a sense of good ol optimissim keeps risk afloat these days, so I am kind of aimless on what to make of the next 2 weeks for now.

I said in my previous post I'd try to post a forecast or two but I regret to say I'd have to eat my words.

Perhaps in the next few days of watching price action and market developments, I'd then write something.

Have a good week ahead peeps!

My EURUSD Call

I guess I under-estimated the market's willingness to take on risk.

In my previous forecasts on the EURUSD and USDJPY on the Sunday before last, I called for the two currency pairs to fall on persistent uncertainties within the banking sector and EZ economy.

Yes my orders to sell were hit at 1.3425 and 99.40 for the EURUSD and USDJPY respectively, the two obviously did not move down to my target zones at 1.31 plus and 97. USDJPY did trade near the 97 handle though, but not near enough to my desired level.

I did take some profits off the table in the EURUSD on Wed when it got stuck at low 1.33 because price action tells me there is some strong buying that keeps coming back into the market.

I just closed out the remaining position at a small loss near the opening price because this trade seems to be a lost cause. Sometimes we have to live with a poor call. Not allowing a trade to run deep into the red should be priority. Ego is second.

My USDJPY position is still open though, but I'll be closing it soon if cross yen buying persists. I sold at 99.25. The only thing that is keeping the USDJPY contained is broad dollar weakness it seems.

On Thur, the ECB announced a refi rate cut of 0.25% to a record low of 1% as well as a plan to buy up to Eur 60 bn worth of covered bonds to ease credit conditions in the EZ.

Well, Eur 60 bn is just a small percentage of the total outstanding issuance in the EZ market and is not expected to make much of a splash but the fact that the EURUSD jumped after the announcement says a lot about the market.

There is pent up demand for risk.

And look at the sterling pound - after announcing further Quant Easing (bringing the total to GBP 130 bn from GBP 80bn), the pound recovered from its post news sell-off to end the week at 1.5237, from under 1.50 on Monday.

Maybe next week we might see some profit taking, but I wouldn't bet against another surge higher.

Will try to write a post on my forecasts for the next couple of weeks before the weekend is over.

Hope your weekend has been good.

The May ECB meeting

On Thur 7 May 09, the ECB will conclude their May meeting and many expect them to announce a rate cut of 25bps as well as some form of 'unconventional measures' to ease credit conditions in the Eurozone.

Pres Trichet and co are keeping their cards real close to their chests and not divulging what kind of 'unconventional measures' would be employed.

But I suspect there won't be so much of QE or Quant Easing, employed by both the Fed and BOE. Because three quarters of the supply of the EZ's credit comes through banks, lesser on securitization of debt, hence there is more of a need to target bank lending instead of the secondary securities market.

QE through the form of direct purchase of corporate debt by the governments is hence, unlikely.
Judging from price action of the EURUSD today, it seems there has been good and consistent buying, with the pair stabilizing around the 1.33 pivot after crashing to low 1.32 after the release of the WSJ report that BoA needed a massive USD 34 bn in additional capital.

Perhaps this is why..

1. Pre-empting the ECB outcome tomorrow, the market is buying on the rumour and will sell on the news. As traders expect the ECB to not implement QE, the Euro will be supported up until the announcement and get sold off after.

I have written before in previous posts on the lack of fundamental reasons to expect the EURUSD to go much higher. It will continue to trade in the downward channel - which I also illustrated on a previous post. Mid 1.31 is a likely target.

2. Less likely to occur: If the big surprise happens and the ECB does announce QE, the Euro will see a fire-sale. Selling EURGBP, EURCHF would be good ideas in this case.

Either way, I see the EURUSD to sell off at the end of the day.

3. But of course, if later in the NY session, the US bank stress test results are better than expected i.e. lesser than the reported 10 banks need more capital and the biggies like BoA and Citi require substantially less capital, then the mood will turn positive, leading to the buying of higher yielding currencies like the Euro, GBP and AUD.

Barring ECB QE, the EURUSD will go higher.

Snippets of the day - Wed 6 May 09

This morning in asian trade, news flashed across the Reuters screen saying that BoA might need USD 34 bn more in capital.

Coming as a surprise, the market promptly sold Dow futures, the Euro and cross yen pairs in a short flight to safety.

The worry of poorly capitalized US banks is the centrefold of the stress test result, which will be officially announced on Thur. If a majority of the 19 major US banks need to raise a lot more capital, then risk aversion will return for sure.

But, for political reasons, I doubt this will be the way the US government will put it across. They'd make it less of a problem than it really is.

After all, the government said no banks will need more public money after this test, and by the experience of the whole crisis, only seriously ill banks need public funds.

Fed Chairman Bernanke also said 'most banks are well capitalized'.

But still, this Thur's announcement should pose as a potential event risk. I won't be taking a position in stocks until I can see where sentiments are heading.

However, the sell off in the morning didn't last as euphoria once again overtook the asian stock markets. Judging from past weeks' statistics, foreign money had been pouring into asian stock markets and this doesn't look like stopping.

Maybe Asia is where growth will recover first.

Most bourses rallied higher impressively.

Snippets of the day - Mon 04 May 09

The rally just wouldn't quit.

Stocks have been rallying for the past 7 weeks and has surprised even the most bullish investors. Today, the Hang Seng and STI indexes surged more than 5%.

Tokyo is out until Wed for the Golden Week holidays, so forex liquidity is lesser, but that did not stop the Euro and Pound from climbing higher against the dollar on continued stock outperformance.

Both the EURUSD and EURJPY stopped short of somewhere near 100 pips higher from the open. AUDUSD surged to a 7 month high at near 0.74.

However, around GMT 0420 onwards, the rallies took a turn for the worse and eventually gave up all gains hours later as traders took profit. ECB member Weber's statement that the EZ banking system needs more 'cleaning up' and downgrading of EZ growth forecasts by the EC compounded sentiments.

But, I don't think now is the best time to jump right into the carry trades on this correction as we will see announcements from the stress test results, BOE and ECB this week.

Still too much uncertainty.

The ECB might surprise everyone by announcing more than expected QE measures, though I doubt that will happen. What is likely to happy though, are milder measures that include an expansion of the repo agreements etc.

Of swine and writedowns

The markets got spooked by the swine flu yesterday. Stock markets from Asia to NY were invariably sold off, pulling higher yielding currencies and the yen crosses down with them.

Today, risk aversion stayed but the attention has shifted over to the results of the US banks' stress test results.

WSJ reported that the Fed will try to get Boa and Citi to raise capital to buffer further writedowns in the future.

I guess uncertainties will linger until a resolution is confirmed related to the stress tests. The Dow futures stayed in negative territory throughout the Asian trade on the news as the familiar sense of banking worries came flooding back.

To think of it, these 2 banks seem to be the more probable 'victims' of the stress tests judging from the gigantic amount of loan/real estate assets on their b/s which risk non-performance.

The Fed also added results will be out in the 7 May week, not revealing the exact time of the release.

EURUSD got a pounding yesterday as ECB's Nowotny said the ECB might consider implementing some form of QE.

If you look at the EURUSD daily chart, you can see it trading in a downward channel. I expect it continue to trade within this channel where 1.2840 will provide some real support.

That is a support line that stretches all the way from earlier in the decade, with prices having bounced up and down from here. The market has extraordinary memory as it re-visits previous support/resistance lines and I trust this will be no different.

Unless of course, the ECB does QE, Rambo style.

My EURUSD Call

This past week, we've seen some correction taking place for the EURUSD.

The pair surged 197 pts or 1.51% after a thorough whacking the previous week.

The pair had been driven higher by better than expected German ZEW and IFO results which point to a stabilizing economy in the EZ. That saying, we should take this with a pinch of salt as these indicators are measured from a very low base well within the contractionary territory.

I don't see good fundamental reasons for the EURUSD to climb much higher given uncertainties still surrounding the EZ economy and european banking sector.

IMF this week deduced that european banks are facing up to USD 750 bn in writedowns and although these are disputed by economic figures like Trichet and Lagarde, a portion of that estimated amount still create a lot of worry. Plus, jobless rates are growing at a quick pace. Spain just hit 4m.

One major ECB event the market is looking forward to is the 7 May ECB meeting in which ECB members have previously indicated the council will announce 'unconventional methods' to ease credit conditions. Potential wildcard.

If they decide to move to purchase european debt assets in a big way, then it will further hurt the euro. But chances are that they will merely expand their current credit easing programs, given the conservative nature of the ECB on fiscal measures. Nothing much changes.

I'd look for opportunities to sell the EURUSD these coming 2 weeks.

On the daily chart, we see there's a downward channel in which the EURUSD currently trades. in. I'll be looking to sell at the top of the channel, naturally.



However, at what level to sell at is a dilemna for me. I drew two channels on the daily chart and the weekly chart. The tighter channel which is very close to the current price. is from the daily chart. The other channel is wider and more generous spans is drawn in the weekly chart.

Still, being one who always strive for a better risk-reward position, I'd target my order at an appropriate higher price.

Judging from the weekly chart, last week's closing was a bullish engulfing pattern, which may mean further upside.


My call for EURUSD for the next 2 weeks is:

Sell from 1.3400 - 1.3450 (top end of downward channel)

Stop loss: 1.3550

Take profit: 1.3000

My USDJPY call

This week, we've seen the USDJPY fall approx 2% from an open of 99.15 to 97.17 (a 198 pips drop).

It is interesting to observe how the USDJPY - stock correlation continue to play out. Historically its always been when stocks decline, USDJPY will too, as investors flock to the safe haven status of the yen.

This week, we did see a little bit of that, especially from yen cross selling (e.g. EURJPY, GBPJPY, AUDJPY) which depicts escape from the carry trade, but only for the first day of the week.

But cross selling did not prove to be convincing as the EUR, GBP and AUD all climbed higher later in the week but still USDJPY continued to fall.

Well, there isn't much carry trade to unwind in the first place as a lot of de-leveraging had been done in Q4 08.

It is too, especially counter-intuitive as Japanese investors are continuing to pour money out of the country to buy foreign bonds and stocks. The Japanese have a penchant for US securities.

USDJPY should go up in this case.

MOF data indicated that for the week ending 19 Apr 09, net outflow to foreign bonds and stocks were JPY 1,564 bn or approx USD 1.6 bn.

So why is there still downward pressure on the USDJPY?

I feel that the market was a little too quick to push the USDJPY up to beyond 100. Even though Japan's economy is suffering from the exports collapse and perceived fiscal deterioration (bond issue supported stimulus), Japan still stand in good stead as it should continue to run a trade surplus when the global economy recovers and will still be an investment income nation.

March trade surplus showed a rebound into positive territory from the previous months' crash.

Furthermore, MOF estimates that the market still has appetite to absorb the increased JGB issuance to fund the USD 140 bn stimulus package announced by Aso's government.

With the USDJPY yield differential as they are, there isn't much difference for investors to heavily favour USD based assets right now.

Things aren't so bad as it seems for the yen.

From a technical standpoint, the weekly chart below shows a three outside down candlestick formation which means bears having a strangle hold on the market. This means further downside is possible.

I fear that this piece is one week late because I noticed the outside red bar last weekend which means the bears are taking control but did not write. Nevertheless, as the week progressed, there seem to be more fundamental reasons for selling UDJPY. The ethos for my calls have always based on fundamentals. Technical analysis help me to confirm sentiments.

I favour selling on upward moves, near the 50 day moving average at 98. 40 (see chart below).

My call is for the next 2 weeks is:

To sell USDJPY from 98.40 - 99.00

Stop loss: 99.85 (above recent overbought moves)

Take profit: 95.50 - 96 (near neckline of recent double top formation)

Scalping the FX market

Just thought I should share this piece on scalping the FX market.

I think it makes sense because if you are a scalper trying to profit from smaller number of pips e.g. 10-30 pips, it is safer to trade in a directionless market where the big players aren't moving the markets.

Otherwise you might get stopped out very easily.

Enjoy.. http://club.ino.com/trading/2009/04/how-to-scalp-the-forex-without-getting-burned/

Snippets of the day - Wed 22 Apr 09

GBPUSD crashed today because the UK announced a record external debt position. It fell 200 pts into the 1.44 handle at print and has been bouncing up and down since.

Besides the USD, investors fled into the EUR as well. The EURGBP surged to a 6 day high at high 0.89.

With a large external deficit, it would be harder for the UK to implement yet another stimulus package through the issuance of government bonds or gilts. This is because they are already in heavy debts and will face a lot of political resistance trying to push this through.

BOE governor King, has also previously indicated his concerns about the country's bugeoning debts and opposed another stimulus package.

In effect, policymakers' hands are tied. There are less options to boost the economy now. Interest rates are already at an all time low at 0.5%, this means they can't cut much further. They have already tried Quant Easing (plain printing of money to purchase gilts), and this is no quarantee to succeed.

QE = GBP devaluing.

In fact, yesterday, a BOE member mentioned that they might implement more QE if this round does not work as well as expected. By June we can see if the current round of QE is working.

If so, I see another sell off in GBPUSD and GBP crosses.

Snippets of the day - Tue 21 Apr 09

As I mentioned in a previous post, sometimes the asian trade tend to extend the sentiments from the overnight session.

During the NY trade last night, higher yielding currencies and their crosses were sold ernestly as the asian market woke up in 'risk aversion' mode.

Carry trades like EURJPY and GBPJPY fell about 100 pts in the early morning before rebounding higher.

But these eventually turned positive in the evening, helped by a surprisingly good Apr ZEW survey outcome (+11 vs -2 expected if my memory serves me right).

The ZEW measures investor or business sentiment and is an important forward looking data for the German economy and is usually one of the more important economic data.

EURUSD, GBPUSD and their crosses surged, recouped all losses and went beyond thereafter.

If one manages to follow and trade the general trend down and up, it can be very rewarding as the mentioned currency pairs remained in defined channels for large parts of the day and did not turn up nasty surprises suddenly.

Snippets of the day - Mon 20 Apr 09

Earlier in the Asian trade today, currency movements gave the market a taste of what was to come in the overnight market.

Higher yielding currencies were sold in droves.

At print, the EURUSD lost 96 pips or 0.74%, the GBPUSD an even larger 234 pips or 1.58%.

EURJPY was down 262 pips or 2.03% and the GBPJPY 421 pips or 2.88%.

The Dow is tradding 221 pts or 2.72% lower.

Earlier in the day, UK Investment and Trade minister Davies said that export competitiveness via a cheaper GBP could pull the UK out of the recession, sending the GBPUSD and crosses spiralling lower.

He said the exact same thing on Friday but he was in Hong Kong. Today he is in Singapore.

You could make the same point in two different places, like holding a concert.

Again.. the market reacted. And EURGBP surged higher for the first time in days.

I guess the FX moves today pre-empted the selloff in stocks.

Being in the office staring at the interbank rates, I could almost feel risk aversion rearing its ugly head again. Just a few days ago, the NYSE CEO said the recent stock surge was not sustainable as 'real money' through the likes of pension funds are not yet back in the market.

Perhaps he is right. There will be a further stock correction coming in the next few days if so.

B0A announced better than expected earnings but this was a non-event as the market already priced in the 'good news'.

The mini bull run could very well be over.

The EUR and ECB speak

Yesterday, the EUR plummeted again. The single currency fell 1.21% or 159 pips to 1.3026 to the dollar.

I covered my half short position for a 323 pips profit. (The other half profit was taken at 1.3174 as written in a previous post).

I will explain in another post why I took my proft earlier than initially planned (though I had expected EURUSD to drop to below 1.30 before the end of next week).

Last Sunday, I judged that EURUSD might take a hit, and it did, but not without the help of ECB speak.

ECB PresTrichet spoke yesterday in Tokyo saying that the ECB will do everything it can to stop the rot in the EZ (read: cut interest rates again), albeit inflation expectations having been already anchored.

The recent inflation reading was 1.9%, under the 2% standard the ECB set. So the need for keeping higher interest rates is less now.

Recent statements by members like Provopoulos, Orphanides, Nowotny and Vice Pres Papademous also spoke out in support of purchasing debt assets to ease credit conditions. Of course, this would tantamount to a move in the direction of QE and will be devaluating to the currency.

Those statements took confidence out of the EUR, thus, throughout the week, the EUR was consistently sold against the USD, JPY and the GBP.

It is also funny how when stocks are rising, the EURJPY, often a barometer of risk taking, declined. It lost 2.16% or 289 pips to close at 129.34.

Two things, either investors have lost confidence in the recent stock rally in the view that it does not have legs to go much further and are unwinding their long EURJPY positions, or that the market is pricing in a rate cut by the ECB AND some QE measures in the May ECB meeting.

Where are we now?

The past week had been a highly anticipated one, with Q1 bank earnings in the offing. As you might already know, the banks, namely Goldman Sachs, JP Morgan and more critically, Citigroup have all announced better than expected earnings.

On any other week, this would have caused a larger stock rally than what we have witnessed. The Dow moved higher by just over 100pts or 1.3% on the week to close above 8100 pts.

I guess this was because the market had already more or less prepared itself for the results, which, to the admission of many now, was greatly helped by AIG's unwinding of huge credit positions to the benefit of these banks and lossening of accounting standards on hard to value assets.

Nothing much has fundamentally changed.

Next week we will have BoA announcing Q1 earnings on the 20 Apr, Bank of NY Mellon, US Bancorp and State Street Corp (large investment firm) on the 21 Apr and Wells Fargo on the 22 Apr.

I feel that even if one or two of the banks report poorer than expected earnings, the stock market will take it on its stride as it has already looking beyond these earnings.

Because the recent stock surge was predicated by economic data that proved the US economy is no longer in free fall. Stocks have always been a leading indicator of economic recovery and it is trying to do its job now.

That saying, the next question is whether stocks will go much higher from there or consolidate is a hard call. I feel the latter is more plausible.

Even though economic data have stabilized, but the US is still at a very low level in terms of industrial production, home prices, still rising unemployment and of course is still in the midst of develeraging, which in turn will further pressure asset prices e.g. real estate.

Until these pan out properly over the next few months, I don't expect to see stocks making a marathon higher again.

I might go the way of range trading.

Profit taken from half of position on EURUSD

Following my post on Sunday 11 Apr 09 My EURUSD forecast, my order to sell EURUSD 1.3349 was filled on Monday as the EURUSD surged to high 1.33 from high 1.31.

Tue and Wed saw this gain wiped out as deflation concerns coming out of the EZ caused the market to price in further cuts and speculation on asset purchases by the ECB in May gained traction.

As part of my usual strategy, I closed half the position at 1.3184 (165 pips profit) and decided to let the other half run, in the hope that EURUSD will continue to decline to below 1.30 before the end of next week where I will take profit again.

To prevent this remaining half position from turning into a loss, I placed a stop at 1.3349, exactly where I opened the position. So effectively, I have a free trade. The maximum I can lose on this trade is zero.

USDSGD blindsiding

Some market players had been blindsided by the MAS' latest monetary guidance released early this morning.

On the back of collapsed exports demand, the market had expected the MAS to devalue the SGD in a more aggresive form, some were even hoping for a path of depreciation of the SGD to help exports (70% of GDP).

However, the MAS' stance was different. Their published statement emphasized their focus on maintaining domestic price stability, and to do that, the SGD is kept at a zero appreciation path and the trading band in which the SGD trades in was re-centred to the current SGD NEER level which they deemed appropriate to keep prices stable.

And as a parting shot at the end of the statement, it says 'there is therefore no undue reason for SGD weakening'.

Upon the news release, USDSGD fell approx 200 pts to 1.4950 from 1.5150 in thirty minutes, clearing all stops along the way.

I got stopped out.

To be fair, the WSJ praised the MAS for taking a more prudent step this time. Even though Singapore's exports have been severely curtailed by the economic crisis, not allowing a sharper depreciation of the keeps investments in Spore more attractive. Afterall, the city state is a fund management hub in S.E. Asia, with USD 800 bn AUM.

Furthermore, competitive devaluation of the currency will not guarantee an increase in exports.

When I have a view on the USDSGD, I'd post something.

My EURUSD Call

As an Easter day gift, Well Fargo reported Q1 results on Thur 9 Apr to be much better than expected. That helped the Dow to surge a whopping 246 pts and the S&P 500, 3.81% higher.

Looking at the charts of those indices that day, the indices never looked like even making a convicted correction. The market is happy to stay long, I guess as there could be more surprises in the other banks' Q1 announcements coming up ahead.

But I still prefer to be cautious. JP Morgan said March was a 'tough' month. I'm keeping my emotions neutral before the next few announcements.

Over to currencies, EURUSD took a good amount of correction this week. The lure of the yield differential against the USD seems to have diminished as investors sold EUR to buy USD, JPY and GBP. Charts of EURJPY and EURGBP have shown obvious declines..

Case for a weaker EUR going forward

Perhaps, this was profit taking. Perhaps, people are judging the ECB to be behind the curve in boosting the economy. Perhaps the IMF euphoria is dying down and investors are sitting up to notice the huge amounts of potential bad loans and burden in the CEE - central and eastern Europe.

Afterall, an ECB member said the IMF idea of pumping USD 100 bn into the kitty to aid emerging economies was more like creating 'helicopter money'.

This year, the EUR has depreciated just 6% against the greenback. Its strength has contributed to a worse than expected drop in exports in Germany and France. Eventually the EUR might come to terms with itself, that it cannot stay so strong indefintely.

Even an ECB member on Thur said 'a cut beyond 1% could very well be in discussion soon'.

ECB has also started to talk about asset purchases, which more often than not, will devalue the currency. Maybe they'll have something concrete in May.

Looking at the daily chart of the EURUSD, we can see that the it has been making lower lows.

It has quite assuredly broken below the 23.60% retracement at 1.3270. The candlestick hammer formation formed on the 9 Apr signals some buying interest though, but its hard to imagine it is a big one.

Then on the weekly chart, it seems the bears have taken control of EURUSD as seen from the bearish engulfing pattern. This pattern shows that selling pressure is stronger than buying pressure from the previous week as bears took the higher opening and closed it lower than the low of the previous week.

But the volatile nature of FX being that is it, next week might be a week of a small move up if Q1 earnings are good and more risk appetite returns.

Even better, I'd sell at a higher level.

With that, here's my call for the next two weeks:

Sell from 1.33 - 1.3350 (near 23.60% retracement)

Stop loss 1.3450

Take profit at 1.2800 - 1.2991 (congestion in Nov 08 period)